US Oil Boom

With the world forging ahead in this modern industrial and technological era,
the king of commodities continues to flex its muscles as the most indispensable
of resources. Oil, the lubricant of global commerce, is seeing record
levels of demand.

Amazingly global oil demand is up nearly 50% in just the last 25
years. In 2010 it is estimated that a record 87m barrels per day (bpd)
were consumed, surpassing the previous high from 2007. And it is forecasted
that 2011's will come in even higher, at around 89m bpd.

And regardless of the current state of the global economy, oil consumption will continue
to rise over time. According to the U.S. Energy Information Administration
(EIA), world oil demand is expected climb to between 108m to 115m bpd in the
next 25 years. This range accounts for a low-side oil price of $50, and
a high-side price of $200. Even on the low side, demand is expected to
grow by a hearty 21% from today's levels.

Needless to say, this forecast is quite ominous in an environment where big
oil deposits are getting harder and harder to find. And as they've
always done, oil's biggest consumers are jockeying to sustain and grow
their own supplies.

No other country has more of an appetite for oil than the United States. The
US consumes about 22% of the global total, to the tune of about 19m bpd. This
sum is 35% higher than the European Union, the next-highest consumer, and nearly
twice that of third-place China. As a major consumer, the US needs to
stay on top of where tomorrow's oil is going to come from.

Procuring supply is especially important for the US considering its lack of
self-sufficiency. Interestingly the US saw its peak in production way
back in 1970, at about 9.6m bpd. At this clip it only needed to import
about 1.3m bpd to supplement domestic demand. But with its mature fields
depleting and a lack of material discoveries to renew reserves and thus feed
offsetting development, the US suddenly found itself in need of a much-bigger
portion of supplemental supply.

With post-1970 production declining and demand continuing to rise, this supplemental
supply came in the form of sharply-accelerating imports. Incredibly US
oil imports had doubled in only a couple years, and by 1977 they had increased
five-fold. From the late 1970s to the mid-1980s imports tailed off a
bit, but they eventually continued to rise. And by 1994 US crude-oil
imports exceeded domestic production for the first time ever.

In the years following this historic event, the prevailing trends would endure
and the balance of trade would shift well in favor of foreign oil. And
by 2005 oil imports were nearly double the volume that domestic producers were
able to wrest from within the US's borders. But as you can see
in the chart below, it was around this time that a strategic shift in trends
would manifest.

By 2005 US imports had topped 10m bpd, 665% more oil than what this
country was buying from foreigners back in 1970. But this 2005 top was
the highest imports would get. Provocatively, over the last six years
imports have actually been trending down! Over this span the
US has seen imports drop by 1.3m bpd, a material 13% drop from their apex. And
based on the annualizing of official data from the EIA over the first half
of this year, 2011's imports will be the lowest since 1999.

An extended decline in imports the likes of which we're seeing today
hasn't occurred at this magnitude since the first half of the 1980s. Back
then oil supplies were at a big surplus as a result of the 1970s energy crisis. In
addition to this oversupply, demand was down as folks were forced to conserve
energy thanks to higher fuel prices. But this so-called "1980s
Oil Glut" was of course only temporary.

There are two major reasons for this latest decline in imports. And
like the situation in the 1980s, the first is a demand decline subsequent to
the 2005 peak. As a result of higher oil prices and economic turbulence,
US oil consumption is actually down a bit in recent years. But the second
and perhaps more important reason for falling imports is an increase in
domestic production.

Following its 1970 peak, the US had seen oil production fall by a painful 49% to
its 2008 low of 4.95m bpd. You'd have to go back to 1946 to
find the last time the US had sub-5.0m-bpd production volume. Back then
the US was producing about half of the world's oil, a stark
contrast from 2008 volume in which it only produced 6% of the total global
supply.

Over the last 40+ years many of the US's big mature fields had become
depleted, new major discoveries were few and far between, costs were rising
to tap the deeper and/or unconventional reservoirs, and foreign oil was cheaper
to buy. The US's production decline was deemed irreversible, and
this country had come to grips that its oil dependence would need an ever-larger
fix from foreign sources.

But while the US will likely always be dependent on some level of foreign
oil to bridge its supply gap, the deliverance of production growth in
2009 squashed the notion of an irreversible downward trend. And 2009's
8.3% increase in production to 5.4m bpd not only broke a streak of 17 consecutive
years of declines, it started a new trend that is showing this reversal to
be the real thing.

Based on annualized production figures from the first half of 2011, the US
is on pace for its third consecutive year of production growth. Over
this time domestic production will have grown by 12%, adding nearly 600k bpd. And
it is expected that this trend will continue for many years to come. The
EIA sees US production exceeding 6.0m bpd by 2018, with the possibility of
exceeding 7.0m bpd by about 2025. And many experts believe these volume
estimates to be conservative.

There are a couple of key factors that have contributed to the US's
recent growth in domestic oil production. And the most important is
higher oil prices. Preceding the commencement of oil's secular
bull in 1999 was a brutal secular bear. Oil prices remained low for many
years, averaging $26.50 in the 1980s and $19.70 in the 1990s. Over these
bear years there was little economic incentive to explore and develop.

But oil prices flow and ebb with the best of the major commodities. And
upon the turn of the century oil caught a major bid that gave huge incentive
to revisit what was thought to be a dying US oil industry. Major global
conglomerates and small entrepreneurs alike started dedicating resources to
rediscovering opportunity in the US. And boy have they found it!

Higher prices indeed empowered oil companies to pursue the revival of the
US oil industry. And this brought on technological innovations that have
directly translated into production growth. More specifically, advances
in horizontal-drilling and hydraulic-fracturing methods have opened up vast
resources within large shale-oil formations that underlie the US.

Interestingly horizontal drilling is not new. In fact, it has been a
work-in-progress in the oil industry for over 50 years. What's
really revolutionized this method of recent is vast improvements in drilling
equipment and radical innovations in down-hole monitoring instrumentation. Drillers
can now guide their bits at the precise angles/degrees to access longer portions
of deep thin/tight reservoirs.

And precision horizontal drilling has come in real handy when trying to recover
oil from massive shale formations like the prolific Bakken field that underlies
the Williston Basin in North Dakota and Montana. Bakken's thin
band of continuous crude stretches about 25k square miles, with the main pay
zone about two miles below the surface. But since this zone only swells
in thickness to about 150 feet at the most, in many spots pinching under 50
feet, historic operators had little success drilling vertical wells.

With horizontal drilling the reservoir is essentially flipped on its side,
thus greatly extending the pay zone. So instead of pulling oil from just
a small vertical cut of a large thin horizontal reservoir, Bakken's operators
drop their wellbores into this rich formation and extend them laterally. Many
of these wells are two miles in length at the lateral!

While horizontal drilling has indeed accessed this formation nicely, the geology
of this tight oil-bearing rock requires another major step to bring forth an
economic flow of hydrocarbons. Getting oil out of a tight shale body
is an active process, it must be encouraged to flow up the well. And
to do so an operator must stimulate the host rock via hydraulic fracturing
(fracking).

Like horizontal drilling, fracking is not new. It too has been around
for over 50 years and has been a work-in-progress in the oil industry. But
only in recent years have new innovations in fracking allowed formations like
the Bakken and the new and exciting deeper Three Forks formation to see wildly-positive
economics. Advances in multistage fracking have allowed operators to
maximize drainage across the entire lateral, revolutionizing the way petroleum
engineers are approaching shale-oil development.

Incredibly operators are still in the early stages of uncovering the Williston
Basin's enormous potential. And they are making amazing progress
as seen in the Bakken's robust production growth. Production has
grown from practically nothing in the early 2000s to around 400k bpd in 2011. And
many are projecting Bakken volume to exceed 1.0m bpd in the not-too-distant
future. This is significant and material output that
is one of the major reasons for the US's upward trend.

Bakken is the most-recognized of the emerging oil districts, and it has opened
the doors to other shale-oil formations in Texas, Colorado, Wyoming, and Utah
that will farther contribute to the US's growth profile. But new-development
shale plays are not the only contributors to this trend. Enhanced Oil
Recovery (EOR) within existing fields is also getting a lot of play.

Interestingly when a conventional oil well is drilled, its initial production
flow is driven to the surface via natural underground pressure. This
pressure eventually weakens, thus causing the flow to slow and lose its economics. But
since primary recovery only recovers a small portion of the oil, it's
common practice to force the lift of oil via such methods as pumpjacks and/or
re-pressurization (some common secondary methods of re-pressurization include
injecting water and/or air into a reservoir).

Secondary recovery captures more of the oil, but even when this method runs
its course there is still plenty remaining. EOR, also known as tertiary
recovery, ups the ante of maximizing drainage. One of the most common
EOR methods is carbon-dioxide flooding. In this method the operators
re-pressurize the reservoir (usually with water), and then inject the gas which
ultimately addresses the viscosity issues that prevented much of the remaining
oil from coming to the surface.

EOR has been around for a while, but since its development requires big upfront
capex this method needs sustained higher oil prices. In order to roll
out a commercial operation an operator must workover many of the existing production
wells, drill injection wells, build a gas plant, develop a transportation network
for the large quantities of required gas and water, and develop all other associated
infrastructure.

While this process appears cumbersome, it can be quite lucrative. EOR
fields can produce bankable flows for decades. And there are
a lot of mature fields in the US that are amenable to EOR. Oil companies
are of course well aware of this, and they've been scrambling to build-out
operations. And some of the operations built out over the last decade
are starting to bring material production online, which has greatly contributed
to the US's recent growth.

Advances in horizontal drilling, hydraulic fracturing, and EOR, enabled by
higher oil prices, have indeed been major factors in the recent uptrend in
US oil production. And this has allowed investors to capitalize on a growth-oriented US
oil industry, a 21st-century US oil boom.

Following some exhaustive research centered on one of the sweet spots of the
oil-stock sector, I've found that this US oil boom has created great
opportunities for investors. Over the summer at Zeal we took on a major
project to identify the best-of-the-best mid-cap oil stocks that trade
in the US and Canada. And many of these elite producers center their
operations in the US's lower 48.

In our hot-of-the-presses research
report, we fundamentally profile our dozen favorite mid-cap oil stocks. And
surprisingly 9 of the 12 have operations in the US, with 7 having the US
being their primary area of focus. Several of these stocks are Bakken-centric
companies on the cutting edge of technology, and a couple are developing
some impressive US EOR operations.

This report also includes several companies that operate in Canada. Interestingly
Canada was in the same position as the US back in the early 1970s. It
had experienced a peak in production and entered into a decline that most thought
was irreversible. But thanks to the advent of profitable oil-sands production
not only was there a trend reversal, Canada is now producing at its highest
level in history. And this has allowed it to become the US's largest
source of foreign oil.

Mid-cap oil stocks really are a high-potential sector for investors. These
companies usually recycle all their cash flow and then some into drilling projects,
and are typically delivering huge growth at the bit as they strive to one day
join the ranks of the major producers. Mid-cappers are also the sweet
spot for acquisitions by the majors as they look to spend their hoards of cash.

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The bottom line is the world's largest oil consumer is undergoing a
radical shift in some long-standing supply trends. The US is seeing its
first material decline in imports in a quarter century. And this is partly
due to a once-unfathomable rise in domestic production.

Of all the regions in the world amenable to oil development at higher prices,
the US is one of the hottest destinations. And technological advances
have allowed oil companies to find great success in growing production. In
turn, investors are finding that many of the best companies thriving in this
movement are fast-growing mid-cap producers.

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